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Suppose I buy 5000$ worth of Turkish treasury bonds today and the yearly interest rate for 1Y bonds is roughly 25%. Assuming Turkey doesn't go bankrupt in the next year, is there any chance I won't get 5000$+1250$ back?
I don't understand whether a country can postpone interest payments, or I will certainly get my profit back on time.

  • What is the face value of the bonds, especially, in what currency? There's a non-trivial chance that 100% of face value in Lira you get next year is worth less in US Dollars next year than 80% of face value in Lira that you can buy them for today is worth today. – Ben Voigt May 13 at 18:25
  • @BenVoigt Honestly I'm pretty new to the subject... My currency is EUR, I'm looking at turkish bonds because I've seen their rates are extremely high but I don't understand them totally, so I don't know what the face value is. I just want to understand if I'm surely going to get around 25% profit back, assuming the country doesn't fail. – DamiToma May 13 at 18:28
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    @DamiToma As a new investor, always assume that if the apparent return of something is 'extremely high', that the associated risk is also 'extremely high'. Assume that any public market is always efficient, meaning that things are priced properly. There is no free lunch, and taking on high risk should only occur with an understanding of that risk. – Grade 'Eh' Bacon May 14 at 16:16
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You're contemplating paying 30,000 lira ($5000 US or 4400 EUR) today for bonds with a face value of 37,500 lira. If Turkey doesn't go bankrupt, in one year the bonds will pay out 37,500 lira.

If you had 37,500 lira today, that would be worth $6175 US or 5500 EUR. But you won't have 37,500 lira at today's exchange rate, you'll have it at next year's exchange rate. Which the market strongly believes is going to be much worse than today's exchange rate; that's the main reason why the bonds are selling at a 20% discount from par value today.

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    Very clear, thanks! – DamiToma May 13 at 18:33
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The Turkey overnight bank rate is 24%. That means that a leveraged forex currency position would receive daily rollover interest at about a 23.25% annual-rate after commissions. Of course the forex position doesn't have to use leverage.

The one-year bond can be a bet that interest rates will go down because the bond goes up if interest rates go down. However, a one-year bond is just one-year to redemption.

The currency might go up, or most likely would just hold, if interest rates went up. The interest rates are predicted to come down slightly.

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The term "bankrupt" doesn't apply to sovereign governments quite the same as it does to non-sovereign institutions. After all, the term "bankruptcy" refers to a process by which an entity is discharged or partially discharged from its legal obligations. And one's legal obligations are set by the government. So "bankruptcy" is asking the government to release you from your debts. But if you are the government, that doesn't really apply.

Instead, governments default on debt. This can be a complete default ("We're not paying anyone anything"), or partial ("We're paying back only some of what we borrowed"). If the debt is denominated in the country's own currency, there is also the option of currency devaluation, which is sort of a back-door default; while you will get paid back the same amount of lira, it won't be the same dollar value as what you lent.

So if you're asking whether it's possible that you might not get back $6250 back, even without a complete default, the answer is "yes". There are many cases and when currency risk is taken into account, it is quite likely. For more information, you can see https://en.wikipedia.org/wiki/Sovereign_default and https://en.wikipedia.org/wiki/List_of_sovereign_debt_crises

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It depends on the bonds.

if the bonds are in turkish lira, they will definitely pay it back, but the bond may buy you an egg if hyperinflation hits it. Heck, not even that. This is why US bonds are" safe" - there is no way the US goes bankrupt as they control their own currency and can just issue more of it, obviously causing inflation. The negative of that is that they pay back the bond (X turkish lira), but that is basically - worst case - not even worth the similar amount of toilet paper.

If the bonds are in a foreign currency (from turkey's point of view), they may just not serve it. Have fun suing. Happens all the time. See, to give you X USD, turkey has to HAVE X USD - no way for them to just make them up (print them). And if the local currency goes down, serving the debt becomes more and more expensive. Argentina has a history of defaulting, i.e. - look them up on google. https://en.wikipedia.org/wiki/Argentine_debt_restructuring has some background.

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